Supply and Demand
In economics, supply and demand are factors which influence the cost of a good or a service. They are represented as lines on a graph of all possible prices, and the quantity demanded or supplied at each price. The point at which the supply and demand curves intersect is the equilibrium price, which determines the ideal quantity for producers to supply and the price at which to sell. The basic laws of supply and demand are: #If price increases, quantity demanded decreases and quantity supplied increases #If price decreases, quantity demanded increases and quantity supplied decreases #If demand increases, price increases #If supply increases, price decreases These principles demand that other factors in the market remain constant, or ceteris paribus ''(other things being equal). Determinants of supply The actual supply curve can be shifted by several factors, meaning the industry's willingness to supply can be shifted. These factors must be non-price, since price is already accounted for by the graph. 'Production cost' When the factors of production increase in price, a firm's profit margin is decreased, ceteris paribus. Factors of production include labour costs, taxes, and oil prices. Therefore, an increase in the production cost results in a leftward shift of the supply curve. This also makes the product more attractive to producers, which can lead to an increase in the number of sellers. 'Technology' As technology improves the efficiency of manufacture, costs decrease, incentivizing the firm to produce more. Technology in this sense encompasses all equipment and methods relating to production and logistics. Examples include the printing press, the personal computer, and affordable ballpoint pens. This also makes the product more attractive to producers, which can lead to an increase in the number of sellers. Improvements in technology shift the supply curve to the right. 'Number of sellers' If more firms produce something, the total supply will increase, driving down the price. As the number of sellers increases, the curve shifts to the right. 'Expectations of future prices' If a firm anticipates high prices in the future, they may retain their inventory, causing an artificial shortage of a product to send prices rising, before they liquidate and take advantage of higher prices. For example, if a pencil company expects prices to rise in September, they will stock up on pencils and delay selling them. Determinants of demand Similarly, factors can affect the aggregate consumer interest in a product. 'Income' As an individual makes more money, a purchase makes up a smaller proportion of their income, and thus price becomes less consequential. If Joe Brown consumed chocolate bars religiously at a rate of 1 bar per day, he would definitely consume more if he was given a raise, ceteris paribus. Usually, as income increases, demand experiences a rightward shift. This applies only to normal goods, whose demand increases with income. Inferior goods are products whose demand decreases as the consumer becomes wealthier due to stigmas and social pressures. Examples of inferior goods are RoseArt crayons and public transit. 'Consumer tastes and preferences' As time progresses, the interest of consumers will deviate and change based on current events, advertising, fads, propaganda, music, etc. If a popular rapper endorses Colgate toothpaste as the explanation behind his success, the demand for toothpaste, specifically Colgate toothpaste will increase. If the attention is favourable, demand experiences a rightward shift. If a product fades from public interest or receives negative attention, demand will experience a leftward shift. Many preferences of the consumer are motivated by emotion, which is why the airline industry suffered after the September 11 terrorist attacks. 'Price of related goods' Demand for a product will be negatively affected if prices of similar products (i.e. competitors) decreases. The shift in demand will be greater if the products are more similar. For example, in the oil market, where every firm produces a virtually identical product, a price increase of even $0.10 will cause a firm to lose nearly all of its customers. However, in very distant substitutes, like RoseArt and Crayola crayons, an increase in the price of Crayola will barely have an effect at all on demand, since RoseArt are perceived to be significantly poorer crayons . The demand of a good moves to the left if substitute goods decrease in price, and vice versa. Complement goods work in conjunction with a specific good. An example is a camera and a memory card, they are complementary goods to each other. If the prices of complementary goods rise, the demand of a good will shift to the left, since those prices somewhat carry on to the good itself. If a memory card increases in price, it is suddenly more expensive to own a camera, despite the camera not changing at all. 'Expectations of future prices''' If a consumer anticipates that a price will increase in the future, they will try to buy sooner. On the other hand, if they anticipate that the price will drop, they will hold onto their money. Expectations of price increases send demand to the right, expectations of price decreases send demand to the left. Category:economics